Stock Sale!

Are you sitting down? I sold all my shares in a company that has increased its dividends for 62 years continuously. Can you guess which one? Read on to discover if there’s any method in my madness…

What I sold

I sold all 18.2693 shares of American State Water (AWR) with a total cost basis of $537, for $826.28.

I paid a total of $8.96 in commissions across two brokerages, resulting in $817.32 net cash received.

My first purchase of AWR was on 5/1/2013 when the original yield was nearly 3%. I added small amounts in 2014. So the sale proceeds will incur some long-term capital gains and a total tax hit of about $43 in 2018.

About the company

American States Water Company is the parent of Golden State Water Company and American States Utility Services, Inc.

Golden State Water Company provides water service to customers located within communities in Northern, Coastal and Southern California. A division of Golden State Water Company, Bear Valley Electric Service, distributes electricity to customers in the City of Big Bear and surrounding areas in San Bernardino County, California.

American States Utility Services, Inc. provides operations, maintenance, and construction management services for water and wastewater systems located on U.S. military bases.

The company has been in business for 86 years, and has increased dividends for 62 years. That’s an impressive achievement. Dividend growth is certainly a key factor in the company management’s mind. It’s a metric that they’ve been careful not to break too e.g. the freeze in dividends for ten successive quarters in 1993 and 1994 was timed such that it still counted as successive year-on-year growth.

Reasons to keep holding

When considering to sell stock, it’s good to think of the reasons not to sell it.

I certainly don’t have any knowledge that says this stock is about to sink in value. The company is fine and I think it’s very conservatively managed. I do believe part of the reason it’s gone up so much over the last three years is due to the search for higher yields. With a 62 year dividend growth it is no doubt viewed as a bond-substitute.

1) Stocks are for the long-haul

Growth might be slow for a couple of years, but the company is still financially sound so we should continue to hold.

2) It’s had 62 years of dividend growth and will likely continue.

AWR maintains a solid payout ratio of about 50-55%, down from highs of 80% in 2008. Even if earnings stagnate, it can still afford to grow the dividend at the expense of its payout ratio. However, it’ll have to reduce capital expenses going forward since the last two years have been funded by an excess of cash. Free Cash Flow was $8M in 2015 and is currently -$41M on a TTM basis. (source: Morningstar)

AWR won’t fail to meet 63 years of dividend growth. In fact it can simply maintain the current dividend for the next seven quarters, increase the dividend in November 2018 and still show unbroken yearly dividend growth for 64 years.

3) Last year’s dividend growth was 4%.

Growth rates have been trending down from a high of 19.7% (2013) through 9.3% (2014), 5.2% (2015) to the most recent 4.6% (2016).

Still, a 4% raise is still pretty good – I’d be happy if I received that at work this year!

So why sell?

Why sell indeed? I don’t like selling any stock so normally I would just continue holding. However I decided to sell for a combination of reasons, listed below in no particular order.

1) I believe the shares to be over-valued.

The stock is selling at a P/E multiple of around 28. So investors seem to be expecting a lot of future earnings / growth. Yet it’s a water utility, not exactly a sector known for growth.

To be fair, it has done well over the last three years since I bought it and grown at an average 17.4% CAGR. This has beaten the market’s average of 11.8% CAGR , but the growth has pushed the dividend down to 2%. (source: Portfolio Visualizer).

The following chart shows the decline in dividend yield over time. It’s a little unfair to compare today’s yield to that from 20 years ago, but I think it’s an interesting chart nonetheless. (source data: Yahoo)

2) The growth prospects of AWR are pretty low.

Projected earnings growth over the next five years is just over four percent annually (source: finviz). Of course this should be taken with a grain of salt, but it’s unlikely to be stellar. Revenues / profits have been down for the last three years in a row and there’s only so much cost savings that can be done.

3) I’d like to get closer to my target asset allocation.

While I don’t plan on selling individual stocks to get down to my target allocation of 10% of my portfolio, this seemed like a reasonable stock to pick.

It’s not exactly a large holding in the first place, and it’s outside of my target dividend yield range (usually I want > 2.25% yield). It’s not a stock I would consider buying right now if I had new money to invest.

Summary

Putting things into perspective, I’ve sold $827 worth of shares out of $164,319 worth of US stocks. That’s a 0.5% change in my portfolio so this isn’t exactly a seismic event.

Could AWR go on to crush the market and have a runaway CAGR? Possibly. Will my portfolio even notice with this number of shares? Probably not.

Would I buy AWR again?

Certainly I might be persuaded under some conditions:
a) I happened to have spare money in my portfolio, AND
b) AWR’s value was cheaper than today.

But I’m not holding out for that to be the case. I will be reinvesting the money immediately that it clears my account.

What will I be buying with the proceeds?

I’ll be adding the money into additional shares of VHDYX. This should result in about $24 of forward dividend income, about $7 more than the $17 AWR would provide.

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14 thoughts on “Stock Sale!”

You made a solid decision (I didn’t want to say “right” or “wrong” because I don’t try to predict the future). Given your analysis, it seems the stock isn’t going to improve your portfolio that much. In addition, since it is a smaller portion of you portfolio, even if the price or dividend did increase significantly, again, it wouldn’t have made a huge difference.

What are your thoughts on REITS? I don’t think you have any in your portfolio but I could be wrong.

Hey Erik,
I don’t like selling – it’s extra work to shuffle money around and it means I have to write a post to explain why. Having a blog as a kind of investment journal is actually good at promoting a buy and hold strategy. But it’s not the kind of decision I’m going to look back in twenty years time and regret anything.

You’re right, I don’t own any REITS now. I used to…I went with timber (wood) REITS as I figured wood is the one replaceable natural resource on the planet. But I sold them in my taxable account a couple years back; although they’re higher income/yield, they’re taxed higher and I’m already tax inefficient as it is. So e.g. a 4% dividend stock is better overall for me than a 4.7% REIT.

I also held a 5% REIT allocation in my retirement account (401k / IRA). They tend to be a little uncorrelated with the stock market so can add some total return, but they’re still stocks at the end of the day. I recently decided 5% wasn’t going to make much difference though, so I exchanged them all into TSM and now I’m back to a boring (but good enough) three-fund portfolio. Simple is good.

But certainly nothing wrong with them, especially for an income-oriented strategy, and likely good for a ROTH account.
Best wishes,
-DL

I don’t blame you for selling. I think it of the same way I think of situations where people say, “you couldn’t pay me enough to sell it.” Really? There is always a price. Where there is an entry, there is always an exit. It sounds like you saw your exit and you took it. Rebalancing is a way of life. As long as you keep playing the game, you can continue the quest to win. Only way to lose is not to play.

Hi DividendReaper,
Yes, I’m happy with my decision. And certainly someone was interested in buying my shares at that price, and even more so today since the price went up. I appreciate your insight and agree with you. I won’t ever be actively trading but I don’t mind locking in a gain from time to time – better to sell high than low.
Thanks for stopping by!
-DL

I totally understand your reasons behind the selling. The company is clearly a bond substitute without big growth potential. At lower levels (around 30$) it would be a really good buy, but I’m sure the rising interest rates are working against the share price (not the company itself).
There are better opportunities out there!

Definitely valid reasons for selling. AWR is well run and like you observed, very conservatively managed. The dividends keep rolling in decade after decade, but the current valuation is just insane. Pay 28 times earnings? No thanks. I will wait for better opportunities or look elsewhere with my money.

Hi R2R,
Yes I completely agree. I won’t sell a stock every time I think it’s over-valued, but a combination of factors led me to this particular sale.
Thanks for stopping by, I always appreciate your insight.
Best wishes,
-DL

Hi timeinthemarket,
Yes. It’ll also be interesting to see how the interest rates do and if higher rates will dampen enthusiasm for highly priced dividend growers.
Appreciate your comment, thanks!
Best wishes,
-DL

I like the move. you can always buy again on the next market correction. I’ve looked at this stock, but felt it was overvalued. That’s not to say I won’t buy it, but the price will be lower if I do. Nice sell.

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